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Granite Construction, a 102-year-old California construction company, has gone progressive, and it’s taking that change all the way to the bank.
The Watsonville, California-based firm said its shift to more collaborative, “best value” project delivery methods, such as progressive-design-build and construction manager/general contractor deals, is benefitting its bottom line.
As opposed to more traditional approaches such as bid-build, those contract structures allow for more flexibility and check-ins between contractors and owners along the way, reducing the overall risk of unknown outcomes for complex jobs, the firm said on its second quarter earnings call Thursday.
Kyle Larkin
Permission granted by Granite Construction
“The collaborative delivery methods utilized in best value projects… better position us for success by allowing us to work with our clients early to identify and mitigate risks,” said Kyle Larkin, Granite’s CEO, during the call. “Larger best value projects are often separated into smaller work packages that are reviewed through multiple project workshops. This provides more opportunities to identify, assess and address risks than large bid-build projects.”
Q2 numbers
That approach helped Granite deliver higher revenues, solid profits and an abundance of backlog during the second quarter.
The firm said it had $1.08 billion in revenue for the period, a 20.5% jump from 2023’s second quarter. Backlog came in at $5.6 billion, rising $139 million, or 2.5% from a year ago. The firm also ended the quarter solidly in the black, with $36.9 million in net income compared to a loss of $17 million during the same period last year.
It attributed that positive momentum to booking more jobs under collaborative delivery methods. For example, 42% of its backlog now falls into what it describes as best value — those that use progressive or non-traditional bid processes.
The end result, Granite said, is that its teams can sit down at a table in the construction trailer with owners to work through issues, rather than a courtroom — an outcome that’s only too common on many long, complex jobs. For those reasons, alternative delivery methods are becoming increasingly common on large, publicly funded projects.
“We have a history of successful best value projects and generally find that these projects are constructed more efficiently and with significantly fewer claims compared to other contracting methods,” Larkin said.
Another materials acquisition
The company also continued building up its materials business, where it supplies aggregate and asphalt to its own jobs and those of other contractors. Granite announced it has agreed to buy Dickerson & Bowen, an asphalt and aggregate supplier in Brookhaven, Mississippi, that has annual revenues between $80 million and $100 million.
While Granite didn’t disclose the price of the deal, Lisa Curtis, the firm’s outgoing chief financial officer who in May announced her pending retirement, said the company would fund the transaction using cash on hand. The Dickerson & Bowen purchase follows Granite’s acquisition of two other materials firms in 2023 in Memphis for $278 million.
Since then, Granite has also restructured its business from an operations perspective. It has simplified its business approach into two divisions — one focused on construction, the other on materials — instead of multiple geographic units that encompassed both areas.
Larkin said the new approach of focusing on progressive delivery methods while dividing businesses operationally is providing the firm with renewed momentum. That’s been happening in a still-strong bid environment fueled by the $1.2 trillion Infrastructure Investment and Jobs Act passed in 2021.
“Our [backlog] of $5.6 billion is a testament to the continued strong public and private market environment supported by the IIJA, healthy state budgets across our geographies and our experienced teams, winning work in our home markets,” Larkin said. “I believe there are opportunities available in the coming months for us to continue to build [backlog] in the remainder of 2024 and in 2025.”
Higher prices, lower volumes
If there was a soft spot in Granite’s results, it came in the renewed focus on its materials business. While the division was able to push its pricing higher — it charged 5% and 10% more, as previously promised, on asphalt and aggregates, respectively — Curtis said that pricing power came on lower sales volumes.
Investment analysts on the call picked up on that decline, and asked if it was part of a wider trend where construction equipment rental companies have also seen a slowdown, particularly in the West.
Larkin said that wasn’t the case, at least not for Granite’s core market of publicly funded infrastructure jobs.
“We see demand remaining very strong, and I think you can see that certainly in our [backlog],” Larkin said. “Perhaps what you’re seeing from the rental companies, it could be more on the private side, certainly, maybe tied to residential, which is not a market that we’re really correlated with.”
Indeed, since interest rates started rising in 2022, construction has seen a bifurcated market where publicly funded civil construction work has remained robust, while privately backed projects in the residential and commercial sectors have struggled.
A different company
Going into the second half of 2024, Larkin and Curtis reflected on how the firm has changed since the pair stepped into their current roles in 2021 as Granite emerged from an accounting scandal.
Curtis, bidding farewell to analysts on her final earnings call at the firm, said “Granite is a transformed company” and endorsed her successor, Staci Woolsey, the firm’s chief accounting officer, who will assume the CFO role when Curtis departs in September.
Larkin reiterated the fundamental reset at the century-old company with its new approach to project delivery and business structure, and said Granite’s future is bright.
“The good news for us is we’re not the same company that we used to be,” Larkin said. “Although we do have execution risk in our business, it’s not the risk that we’ve seen maybe one, two or three years ago.”
Source : ConstructionDive